EXCO Resources, Inc. Reports Third Quarter 2016 Results

DALLAS–(BUSINESS WIRE)–EXCO Resources, Inc. (NYSE: XCO) (“EXCO” or the “Company”) today announced operating and financial results for the third quarter 2016.

2016 Third Quarter Highlights

Turned-to-sales 3 gross (2.7 net) operated cross-unit Haynesville shale wells in North Louisiana in third quarter 2016. The performance of the wells exceeded expectations with average initial production rates of 21 Mmcf per day on restricted chokes and shallow pressure declines.

Produced 288 Mmcfe per day, or 26 Bcfe, for third quarter 2016, above the high-end of guidance, primarily due to strong performance of the most recent wells turned-to-sales.

GAAP net income was $51 million, or $0.18 per diluted share, and adjusted net loss, a non-GAAP measure, was $6 million, or $0.02 per diluted share, for third quarter 2016. GAAP net income includes a net gain on extinguishment of debt of $57 million.

Adjusted EBITDA, a non-GAAP measure, was $25 million for third quarter 2016, 9% above adjusted EBITDA for second quarter 2016, primarily due to higher natural gas revenues from increased commodity prices.

Lease operating expenses were below the low-end of guidance. Cost reduction efforts have resulted in a 38% decrease in lease operating expenses for year-to-date 2016 compared to the same period in 2015.

General and administrative expenses, excluding equity-based compensation, were at the low-end of guidance. Cost reduction efforts have resulted in a 35% decrease in general and administrative expenses (excluding equity-based compensation, restructuring and severance costs) for year-to-date 2016 compared to the same period in 2015.

Repurchased $101 million of senior unsecured notes with $40 million in cash through a tender offer process.

Key Developments

Strategic plan update

EXCO’s strategic plan continues to focus on three core objectives: 1) restructuring the balance sheet to enhance its capital structure and extend structural liquidity, 2) transforming EXCO into the lowest cost producer, and 3) optimizing and repositioning the portfolio. The three core objectives and the Company’s recent progress are detailed below:

Restructuring the balance sheet to enhance its capital structure and extend structural liquidity – The Company remains committed to improving its financial flexibility and enhancing long-term value for shareholders through the continued execution of its comprehensive consensual restructuring program (the “Restructuring Program”). The focus is to restructure its gathering and transportation contracts and establish a sustainable capital structure that provides the Company with the liquidity necessary to execute its business plan.

EXCO continues to evaluate financing alternatives to reduce indebtedness and improve its liquidity. During third quarter 2016, EXCO completed a tender offer (“Tender Offer”) which resulted in repurchases of $101 million in principal amount of its senior unsecured notes due 2022 (“2022 Notes”) for $40 million in cash. EXCO is currently working with its lenders to amend its credit agreement (“Credit Agreement”) and the borrowing base redetermination scheduled for November 1, 2016 is still in progress. As of September 30, 2016, EXCO had $97 million in liquidity. The Company’s plans to improve its near-term liquidity primarily include the issuance of additional indebtedness and it is engaged in discussions with potential lenders. There is no assurance the Company will be able to issue additional indebtedness or amend the Credit Agreement. In addition, the Company continues to negotiate a consensual restructuring of gathering and transportation contracts to reflect market rates and actual utilizations that would mutually benefit EXCO and its counterparties.

Transforming EXCO into the lowest cost producer – EXCO continues to exercise fiscal discipline to transform itself into the lowest cost producer. Lease operating expenses decreased by 38% for year-to-date 2016 compared to the same period in 2015 primarily due to the renegotiation of saltwater disposal contracts, modifications to chemical programs and less workover activity. In the Appalachia region, the Company divested its remaining conventional assets, which had the highest lease operating expenses per Mcfe in its portfolio, and reduced its field headcount in the region by 85% since December 31, 2015. General and administrative expenses (excluding equity-based compensation, restructuring and severance costs) decreased 35% for year-to-date 2016 compared to the same period in 2015. The Company’s cost reduction efforts have resulted in a decrease in total employee headcount of approximately 40% since year end 2015 and approximately 70% since year end 2014.

Optimizing and repositioning the portfolio – The Company continues to execute its disciplined capital allocation program to ensure the highest and best uses of capital, including the completion of a series of asset divestitures as part of its portfolio optimization initiative. In July 2016, the Company closed a sale of its interests in shallow conventional assets located in Pennsylvania and retained an overriding royalty interest. In October 2016, the Company closed the sale of its interests in shallow conventional assets located in West Virginia. EXCO retained all rights to other formations below the conventional depths in the Appalachia region including the Marcellus and Utica shales. The Company is evaluating other divestitures of assets to generate capital that can be deployed to projects with high rates of return. EXCO’s ability to improve its well performance while reducing both capital and operating costs has improved well economics across its portfolio. The Company’s most recent cross-unit Haynesville shale wells have exceeded expectations and are expected to generate rates of return(*) in excess of 80%. The Company is evaluating future development plans based on the availability of capital as part of its Restructuring Program. EXCO’s technical team is performing an evaluation of prospective locations in its portfolio, including the dry gas window of the Utica shale in Pennsylvania and the Bossier shale in North Louisiana. The Company believes that significant upside exists to apply advanced completion techniques that have been effective in other formations based on its technical analysis and recent success of nearby operators.

Includes rigs and wells operated by EXCO and excludes rigs and wells operated by others.

North Louisiana

Highlights:

Produced 159 Mmcfe per day, an increase of 13 Mmcfe per day, or 9%, from second quarter 2016 and a decrease of 38 Mmcfe per day, or 19%, from third quarter 2015.

Turned-to-sales 3 gross (2.7 net) operated Haynesville shale wells during third quarter 2016. The longer laterals and increased proppant have resulted in the Company’s strongest performing wells in this region.

EXCO’s increase in production compared to second quarter 2016 was primarily the result of 3 gross (2.7 net) cross-unit wells turned-to-sales during third quarter 2016. These wells have average lateral lengths of approximately 7,600 feet and were completed with an average 2,650 lbs of proppant per lateral foot for an average cost of approximately $8.6 million. The wells are performing above expectations with average initial production rates of 21 Mmcfe per day on a 23/64th restricted choke with an average flowing pressure of 7,900 psi. The wells were turned-to-sales in late July and were still producing an average of 18 Mmcfe per day at the end of third quarter 2016. The initial results from these wells indicate performance above the Company’s proved reserve type curve of 2.0 Bcf per 1,000 lateral feet and these wells are expected to generate rates of return(*) in excess of 80%. These results provide further confirmation that EXCO’s enhanced completion methods have proven to be effective and increase the potential for higher rates of return on its undeveloped locations. The Company believes there is further upside to its well design by increasing its lateral lengths and proppant use.

The Company is currently evaluating further development of the Bossier shale in North Louisiana with enhanced completion methods that have proven to be successful in the Haynesville shale, including longer laterals and increased proppant use. The Company has approximately 168 gross (78 net) undeveloped cross-unit locations prospective for the Bossier shale in this area. EXCO’s extensive infrastructure in this region will allow it to generate economies of scale to reduce costs in the development of these assets.

East Texas

Highlights:

Produced 69 Mmcfe per day, a decrease of 7 Mmcfe per day, or 9% from second quarter 2016 and an increase of 17 Mmcfe per day, or 33%, from third quarter 2015.

EXCO’s decrease in production compared to second quarter 2016 was primarily due to natural production declines. The Company plans to participate in 1 gross (0.2 net) non-operated well in the southern area of the Company’s East Texas position during the remainder of 2016 to hold certain acreage nearby successful wells drilled by EXCO earlier this year.

South Texas

Highlights:

Produced 4.5 Mboe per day, a decrease of 0.9 Mboe per day, or 16%, from second quarter 2016 and a decrease of 2.8 Mboe per day, or 39%, from third quarter 2015.

EXCO’s decrease in production compared to second quarter 2016 was primarily due to normal production declines and the transfer of its interests to a joint venture partner in connection with the settlement of litigation and termination of a participation agreement. The Company improved its oil price differential by 29% from second quarter 2016 as a result of renegotiated sales contracts during third quarter 2016.

EXCO’s cost reduction efforts have been effective as evidenced by a 47% reduction in lease operating expenses for year-to-date 2016 compared to the same period in prior year. The operating and capital cost reduction efforts and enhanced completion methods would allow the Company to generate rates of return(*) of approximately 50% for undeveloped locations in its core area. EXCO’s acreage in the South Texas region is predominantly held-by-production, allowing for flexibility in the timing of development in this region.

Appalachia

Highlights:

Produced 33 Mmcfe per day, a decrease of 10 Mmcfe per day, or 23%, from second quarter 2016, and a decrease of 14 Mmcfe per day, or 30%, from third quarter 2015.

EXCO’s decrease in production compared to second quarter 2016 was primarily due to the sale of its shallow conventional assets located in Pennsylvania on July 1, 2016. On October 3, 2016, EXCO closed the sale of its interests in shallow conventional assets located in West Virginia. In conjunction with its conventional asset sales, the Company reduced its field employee count in this region by 85% since the fourth quarter 2015. The Company retained all rights to other formations below the conventional depths in this region, including the Marcellus and Utica shales.

The Company is currently evaluating the potential of its acreage in the Utica shale and is encouraged by its ongoing technical analysis and successful results from other operators in the region. EXCO owns Utica shale rights in approximately 40,000 net acres predominantly located in the dry gas window.

(*)

Rates of return are based on NYMEX futures prices as of September 30, 2016, including natural gas prices per Mmbtu of $3.00 for 2016, $3.09 for 2017, $2.91 for 2018, $2.81 for 2019, $2.84 for 2020, $2.94 for 2021, $3.10 for 2022, $3.25 for 2023, $3.41 for 2024, and $3.57 thereafter, and oil prices per Bbl of $49.00 for 2016, $51.65 for 2017, $53.58 for 2018, $54.86 for 2019, $56.05 for 2020, $57.12 for 2021, $57.95 for 2022, and $58.80 thereafter. The rates of return are presented before the impact of income taxes.

Excludes equity-based compensation expenses of $1.4 million, $9.3 million and $0.9 million for the three months ended September 30, 2016, June 30, 2016 and September 30, 2015, respectively, and $14.6 million and $4.0 million for the nine months ended September 30, 2016 and 2015, respectively.

GAAP net income (loss) included impairments of oil and natural gas properties of $26 million and $339 million for the three months ended June 30, 2016 and September 30, 2015, respectively, and $161 million and $1 billion for the nine months ended September 30, 2016 and 2015, respectively.

(4)

Adjusted diluted EPS represents adjusted net loss divided by the number of adjusted diluted shares outstanding during the period. The Company believes that adjusted diluted EPS is a useful measure for evaluating the Company’s core operating performance, although it is not a measure of financial performance under GAAP. Adjusted diluted EPS may not be comparable to other similarly titled measures reported by other companies.

EXCO’s increase in GAAP net income compared to second quarter 2016 was primarily due to a gain on extinguishment of debt of $57 million in connection with the Tender Offer in third quarter 2016 and impairments of the Company’s oil and natural gas properties during second quarter 2016. There were no impairments of the Company’s oil and natural gas properties during third quarter 2016.

EXCO’s increase in adjusted EBITDA compared to second quarter 2016 was primarily due to higher realized natural gas prices. General and administrative expenses, excluding equity-based compensation, were at the low-end of guidance. The Company’s general and administrative expenses during third quarter 2016 were impacted by $3 million of legal and advisory fees associated with the restructuring of the Company’s balance sheet and gathering and transportation contracts. EXCO’s gathering and transportation expenses were above guidance and increased from second quarter 2016 primarily due to gathering costs on increased volumes from recent wells turned-to-sales in North Louisiana.

EXCO’s decrease in operating cash flows compared to second quarter 2016 was primarily the result of unfavorable working capital conversions in the third quarter 2016. The Company’s working capital conversions during third quarter 2016 were negatively impacted by a significant customer modifying its method of credit assurance from a prepayment to a letter of credit. The prepayment related to this customer was $62 million at the end of second quarter 2016. In addition, the Company’s working capital was negatively impacted due to a purchaser of the Company’s natural gas failing to remit approximately $12 million of payments for two months of revenues. As a result, EXCO terminated this contract and is currently in litigation regarding this matter (see further discussion in the “Commitments and Contingencies” section). Adjusted operating cash flows, which exclude changes in working capital, were $11 million during third quarter 2016. This represents a 38% increase from second quarter 2016 primarily due to higher natural gas revenues. EXCO’s financing activities in third quarter 2016 included borrowings of $93 million to fund the Tender Offer and its working capital requirements.

Adjusted EBITDA is a non-GAAP measure. See Financial Data section for definition and reconciliation.

(5)

Cash interest expenses exclude the amortization of debt issuance costs, discount on notes and capitalized interest. In addition, cash payments under the $400 million second lien term loan (“Exchange Term Loan”) are not considered interest expense per FASB ASC 470-60, Troubled Debt Restructuring by Debtors (“ASC 470-60”) and are excluded from the cash interest expenses amounts shown. EXCO’s expected payments on the Exchange Term Loan in 2016 are $50 million. See Table 5 below for additional information on the accounting treatment of the Exchange Term Loan.

(6)

These ratios differ in certain respects from the calculations of comparable measures in the Credit Agreement. As of September 30, 2016, the ratio of consolidated EBITDAX to consolidated interest expense (as defined in the agreement) was 1.6 to 1.0 and the ratio of senior secured indebtedness (excluding the 12.5% senior secured second lien term loans due on October 26, 2020 (“Second Lien Term Loans”)) to consolidated EBITDAX (as defined in the agreement) was 1.9 to 1.0.

Table 5: Reconciliation of carrying value to principal3Q 16; $MM

9/30/16 (Actual)

Factors

Unit

Carrying value

Deferredreduction incarrying value(1)

Unamortizeddiscount/deferredfinancingcosts

Principalbalance

Credit Agreement

$MM

215

—

—

215

Exchange Term Loan (1)

$MM

603

(203

)

—

400

Fairfax Term Loan

$MM

300

—

—

300

2018 Notes

$MM

131

—

1

132

2022 Notes

$MM

70

—

—

70

Deferred financing costs, net

$MM

(13

)

—

13

—

Total Debt

$MM

1,306

(203

)

13

1,116

(1)

The issuance of the Exchange Term Loan and related repurchases of 2018 Notes and 2022 Notes were accounted for in accordance with ASC 470-60. As a result, the carrying amount of the Exchange Term Loan is equal to the total undiscounted future cash payments, including interest and principal. All cash payments under the terms of the Exchange Term Loan, whether designated as interest or as principal amount, will reduce the carrying amount and no interest expense will be recognized. The undiscounted future interest payments on the Exchange Term Loan expected to be due in the next twelve months are classified as “Current maturities of long-term debt” on the balance sheet. As such, the Company’s reported interest expense will be less than the contractual payments throughout the term of the Exchange Term Loan.